Flood Insurance Tip: Get that elevation certificate!

Is the creek rising? The federal government thinks it is and wants to stop subsidizing flood insurance. Sellers and buyers owners of flood prone properties should consider getting an elevation certificate to find out their risks.

Background:

Since 1968 the federal government has been subsidizing the cost of flood insurance for homeowners in flood prone areas. These subsidies proved important in the development of many low-lying properties especially in states with large coastal areas like Florida. However, after the significant flood related losses due to hurricanes such as Katrina and Sandy the cost of providing these subsidies has strapped the federal program. So, in 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act to phase out subsidies for flood insurance for certain properties. The new law does not change subsidies for year-round residents who already have flood insurance. However, the subsidized insurance for these owners will not be grandfathered for the property itself, so new owners may face higher premiums. The new law however will adversely affect owners of second homes or commercial properties. These owners will see increased rates of up to 25% starting this year. Additionally, FEMA has drawn new flood zone maps with new elevation standards. These new maps will cause some homes not currently in a flood zone to be re-designated to be within flood zones. Insurance rates will be directly linked to the true elevation of the property. As a result, the elevation of properties (elevation certificates) and the cost of flood insurance will take on a greater significance in sales transactions.

Practical Considerations:

1. Homeowners that are contemplating the sale of their home and who are uncertain as to whether their property is in a flood zone, should consider getting an elevation certificate or flood zone determination before they list the property.

2. It is likely that property prices will become depressed for properties located in flood zones. Agents will need to do more inquiry as to the cost of flood insurance for such properties.

In August 2013 there were several changes to the standard Florida Realtors/Florida Bar-Contract. One of these changes was found in paragraph 10 (D) which concerns flood zone and elevation certificates. This revision to paragraph 10 (d) inserted a blank line for the parties to designate the number of days the buyer has to the terminate the contract if the property is found to be ineligible for flood insurance through the national flood insurance program (NFIP), or if the lowest floor elevation for flood insurance purposes is below minimum flood elevation. Twenty (20) days after the effective date is now the default provision. Also, this paragraph discloses that flood insurance rates through NFIP may be increasing on non-primary residences and that Buyers may be required to obtain a flood elevation certificate to obtain flood insurance.

Practice Pointer:

Paragraph 10(d) creates an additional escape for buyers where the property is found to be in a flood zone and the finished floor is below flood elevation. However, there’s a temptation to delay the survey work and avoid the expense until after the inspection period has expired. This leaves little time to complete the survey before the expiration of the 20 day period. Agents are advised to use greater diligence to see that survey work and/or elevations certificates are obtained within the flood zone determination deadline (20 days or as per contract).

It should be noted that the language in paragraph 10 (d) puts the burden on the Buyer and agents to determine whether the property under contract is located within or outside a flood zone within the (20 day) deadline. However, agents (especially listing agents) must also realize that paragraph 10 (d) comes under the “Disclosures” section of the contract and that should the Seller or an agent have actual knowledge that the property is located below minimum the flood elevation, they must disclose this fact to the buyeror run the risk of giving Buyer a right to cancel the contract or even a suit for damages after closing.

Note about minimum flood elevations and non-conforming structures: Many local ordinances have adopted building codes containing minimum floor elevation requirements that are .5 to 1.5 feet above flood elevation, so while paragraph 10 (d) can be satisfied where the floor elevation is above the flood elevation, the floor may still be below the minimum elevation as required by ordinance and thus the home may be considered a non-conforming structure and objected to by the buyer. Buyers should obtain an elevation certificate and confirm that the elevation of the home satisfies the minimum height requirements found in local ordinances.